We Need To Crash the Market for Entry-Level Homes

To escape the housing crisis, we need a lot of housing to be built quickly. The key isn't large, ponderous projects; it's fast, widespread incremental development.

The United States has a housing crisis. We need to rapidly build a lot more housing — emphasis on rapidly. Our response needs to break out of the housing trap and scale to the size of the challenge, which is enormous. At Strong Towns, we advocate for a bottom-up approach, one that relies on incremental investments to rapidly build housing units in every neighborhood, everywhere.

Our vision is aggressive. Yet, thoughtful people keep asserting that Strong Towns has a “slow and incremental” approach. Last month, in a well-researched article in VOX, correspondent Rachel Cohen suggested that Strong Towns advocates for a “slower-paced, locally driven form of development.” Ugh.

Slower-paced? I can say over and over that incremental does not mean slow (it doesn’t), but if people keep associating the two — slow and incremental — it becomes my communication problem. I’m going to try to bridge the gap this week. Next week, I will follow up with a look at why, if we are to meaningfully impact prices everywhere, our building efforts need to be focused primarily outside of New York City, San Francisco and Washington D.C.

Large Is Fast? Not Really.

What does it mean to build housing fast? For many, it means building housing large. Large subdivisions. Large apartment buildings. Large 5-over-1 buildings. Constructing lots of units all at once in what seems like an instant transformation.

Yet, even if regulatory burdens were not a problem, large is generally slow. The larger a project becomes, the more complexity is added and the more communication and coordination challenges there are. Economists argue that there is efficiency in scale, but efficient is also not the same as fast. Nor is it the same as productive. Industry consolidation has delivered larger projects, but not faster unit production. (And, subsequently, not lower prices.)

Large is also less locally responsive. The goal of building more units is to make home prices broadly affordable. Yet, with primarily large projects being built, a slowdown in price appreciation — let alone a reduction in home prices — is a strong signal to home builders to pull back on production. This is especially true when housing finance runs through the handful of large, centralized institutions that finance and insure America’s housing.

Current housing construction is like the British Navy at Dunkirk: impressive in size, but too slow, too fragile and too inflexible for the job at hand. The Strong Towns approach to housing, in contrast, is like the Merchant Navy at Dunkirk: fast, nimble, and nuanced in a way that scales to our challenge.

Strong Towns advocates for a reckless amount of housing to be built, an amount that truly will crash the market — the market for entry-level homes. This is an extension of the chaotic but smart approach that we have long advocated for in city building, a sharp contrast to the orderly but dumb systems currently in place. Today we get large projects — but not affordability — with a top-down, centralized approach to housing. If we are truly after affordable housing, we need an approach that is bottom-up and locally responsive.

Compounding

In terms of building housing quickly, the stealth advantage of an incremental approach is the compounding effect. Consider the children’s tale of the penny that doubles in value each day. On the first day, there is just one penny. On the second day, there are two. The third day has four and on and on until the 30th day when that double has grown to $10,737,418.24. It seems astounding, but even adults struggle to grasp the power of compounding returns.

Forbes published an article back in 2016 about running an organization from startup to the surging growth phase. In many realms, from investing to biology to climate science, the graphical representation of this effect is called the hockey stick chart. That penny doubling in the “blade years” doesn’t register as much change, but days 27 to 30 of the “surging growth” yield $1.3 million, $2.6 million, $5.4 million, and $10.7 million. That is what it means to scale.

When it comes to bottom-up housing, the tinkering phase is done. We know the types of units that can be scaled and we know how to build them. Turning millions of spare bedrooms into low-cost rental units (technically, converting single-family homes to duplexes), building cottages in millions of backyards, and building a million starter homes (homes smaller than 1,000 square feet) between existing homes and on empty lots are all easy to do. There are people out there doing this work. The financing mechanisms are in place. The only thing we need now is for cities to devote themselves to doing it.

There is never going to be a surging growth phase in single-family homes and large apartment complexes. To the extent that happened, it happened in the two decades after World War II. Those markets are now mature, an effect I’m going to write about this next week. If we want a surge in units, something that will dramatically impact housing prices, it can only come by addressing the massive demand for entry-level units.

NIMBY: Friend or Foe?

A housing revolution in opposition to existing homeowners is as dumb as a war on cars in a democratic nation where 92% of people drive. Too often, housing advocates rely on shaming NIMBYs or dismissing their concerns as a primary tactic to force construction of a new subdivision here or a new apartment complex there. There are marginal wins to be had with this approach, but it won’t scale to a housing revolution.

More than two out of three homes in the United States are single-family homes. More than two out of three households are one or two people. This extreme mismatch means there are lots of people with lots of unused bedrooms — spaces that can easily be converted into rental units. How many of those households are house-rich and cash-poor? How many could use some assistance mowing the yard or shoveling snow from the sidewalks? There are ways to frame this conversation that show how more people benefit from change.

How many families are close to affording a home but, if they could have a rental cottage in the backyard, could use that income to make up the difference? What about the family that wants to pay for a year of college by splitting their lot and selling part to another family who wants to build a home? How many people would love the opportunity to have an elderly relative — or a younger relative — live in a separate cottage unit on their property?

There are so many common life experiences where building more housing also empowers existing homeowners that it is silly — and counterproductive — to make existing homeowners the villains. Yes, in the current paradigm, where we destroy the next field or forest for a new subdivision of beige garage-homes, or where we tear down six houses and build one mega-building that's out of scale with the neighborhood, NIMBYs will always show up and voice opposition. And their concerns will always be heard because they are valid, human concerns shared by most Americans.

Unless the revolution you are seeking is in our form of government, from democratic to something that centralizes power even more, the current paradigm will never scale. The bottom-up revolution Strong Towns is seeking does scale because it creates the conditions where existing homeowners benefit from more housing, where they have every incentive to either build more or allow more to be constructed.

It is a revolution where lots of housing gets built, at price points people can afford. By flooding the market with entry-level homes, we take pressure off the traditional market for 30-year mortgage products, allowing prices there to moderate (but not crash). We give people shelter while making existing homeowners — the current “villains” of housing advocates — into the heroes of the story. That is the Strong Towns approach.

There are some of you reading this who will immediately protest that, while this might work well in Pawtucket, it won’t work in New York City, Washington D.C. or San Francisco, where there is overwhelming demand and not nearly enough housing. In next week’s column, I’m going to address why we will never solve the nation’s housing problems by focusing on these high-demand cities and why trying to do so makes everything else worse.